Weekly Insight 05.18.22

highlights

U.S. equities posted their sixth straight weekly decline, the first such streak in over a decade. Over that time, the S&P 500 has lost 12%, while the NASDAQ has declined 18.70%.Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10% to -19.99%), and 13 bear markets, with an intra-year average decline of 14%. As of today, the S&P 500 is currently down just over 15%.Mega-cap tech continued to sell-off, weighed down by Apple and Microsoft. As of Tuesday, the plunge in tech stocks over the three- prior sessions led the combine value of all NASDAQ 100 members to shed nearly $1.7T of market value, the biggest wipeout over any similar stretch since at least 2000.CPI increased 8.3% year-over-year, and came in hotter than expectations. However, did decline on a month over month basis, causing some conversation to pick up regarding peak inflation.Fed speak from various members continued to highlight the need for multiple 50bps hikes in the coming months, as they downplayed the probability of a 75bp hike at this time.European Central Bank officials hinted that they could end Quantitative Easing by the end of June and start raising rates in July.In the United Kingdom, Bank of England warned more rate hikes may be needed to fight inflation.In China, industrial output fell 2.9% year-over-year in April, and retail sales plunged 11.1% during the same period.

U.S.

This week is the sixth consecutive weekly downward move in U.S. equity markets, the first such streak in over a decade. The NASDAQ led declines, finishing down 2.80%, while the S&P 500 closed lower by 2.41%. As the broader market sell-off continued, the S&P 500 touched its lowest levels since March 2021, while the NASDAQ hit its lowest point since November 2020.

Although, stocks received a much-needed end of week rally on Friday, in which the S&P 500 and NASDAQ gained over 2% and 3.8% respectively, 2022 has marked the worst start to a calendar year since 1932.

While the declines and volatility can make any client feel uneasy, we want to put in perspective how regularly market corrections happen. Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10%–19.99%), and 13 bear markets (-20% or worse) according to data from CFRA. On average since 1980, the S&P 500 has an intra-year drawdown of 14%; however, in 35 of the last 42 years, the index has posted a positive return.

Source: Bloomberg as of 05.18.22

Continuing to drive price action was the bearish narrative, which dominated headlines, and included:

Higher ratesA potential recessionMore persistent inflation than expectedFed-led global monetary tighteningContinued China lockdowns exacerbatingContinued geopolitical concernsGlobal growth shutdown

These headlines drove bullish sentiment close to its lowest levels on record.

Source: Bloomberg as of 05.18.22

Over the course of the week, growth meaningfully underperformed value with speculative assets and high valuation tech names coming under pressure again. Profitless tech (ARKK -4.5%), cloud and momentum software, solar, and fintech were among some of the largest underperformers, although it is worth noting mega-cap tech was also weighed down by a decline in Apple and Microsoft. As of Tuesday, the plunge in tech stocks reached levels not seen in the last two decades as the combined value of all NASDAQ 100 Index members dropped nearly $1.7 trillion over three days, the largest decline since at least 2000 according to Bloomberg.

Source: Bloomberg as of 05.18.22

Defensive sectors outperformed (with the exception of REIT’s) with Consumer Staples being the lone positive bright spot on the week, while Healthcare and Utilities declined less than all other risk assets. Treasuries were firmer across the curve with the 10-year yield declining about 20bps to 2.91%.

Perhaps the biggest news on the week from an asset class perspective was the blowup in various crypto currencies following the collapse of Luna and Terra. Bitcoin futures were down sharply, declining 16.4% while registering a seventh straight week of declines, finishing below the widely watched $30K level. After the $1T in capital losses seen in the space, JPMorgan warned there could be a spill over to the traditional financial system due to broad- based selling by retail investors. Although, in our opinion, this has not yet been seen and remains a low probability.

Source: Bloomberg as of 05.18.22

CPI AND PPI REPORTS FAIL TO SHOW END TO INFLATION

The most highly anticipated piece of economic data, the CPI report (and to a lesser extent, the PPI report), showed headline CPI increased 8.3% in April year-over-year, down from 8.5% in March, while core CPI (excludes food and energy) increased 6.2% year-over-year, down from 6.5% a month earlier.

While both April prints (headline and core) declined on a month- over-month basis, they both came in hotter than expected, providing little reassurance to investors that the Fed has inflation under control. However, with the sequential decline on a month over month basis, there was more focus and discussion regarding peak inflation, and how that seemingly appears to be in the rear-view mirror, despite a very tight labor market and strong household balance sheets.

Ultimately, the print did not shift rate expectations around with futures pricing in a fed funds rate of 2.63%, down slightly from the week earlier.

Source: Bureau of Labor Statistics, Bloomberg as of 05.18.22

FED SPEAK

This week was extremely busy in terms of Federal Reserve member comments, with many echoing the same general narrative.

Fed Chair Powell reiterated his planned 50bps hikes over the next two FOMC meetings. However, he did reference that the so-called “soft landing” may come with some pain and may be difficult to accomplish given this is the fastest pace of hikes experienced in over two decades.San Francisco Fed President, Mary Daly, said on Thursday that “going up in 50-basis-point increments to me makes quite a bit of sense and there’s no reason right now that I see in the economy to pause on doing that in the next couple of meetings,” in reference to the equity market volatility.St. Louis Fed’s James Bullard agreed with his constituents re-iterating that although the Fed is sensitive to disruptions in the financial markets, market volatility is the result of investors pricing in tighter monetary policy.Federal Reserve Bank of Atlanta President Raphael Bostic said he favors raising rates by half a point at each of the next two or three meetings and is open to “moving more” on interest rates if inflation persists.Federal Reserve Governor Christopher Waller gave the most aggressive comments saying, “I don’t care what the reasons are, inflation’s too high and it’s my job to get it down.”

Source: Bloomberg as of 04.20.22

While the Fed has a dual mandate, balancing an overly hot labor market and surging prices, many believe the Fed would rather send the U.S. economy into a recession than have inflation levels stay at current levels. Despite recession talks picking up as the selloff intensifies and inflation remains at elevated levels, many experts (JPMorgan’s Marko Kolanovic, Goldman’s David Kostin, Morgan Stanley’s Seth Carpenter and MKM’s Michael Darda) believe a recession is not the base case scenario, even though it is an outcome that is increasingly becoming priced in by markets.

International

The Bloomberg World index decreased 2.27% last week, with growth down 2.84% and value down 1.68%. Brent oil edged down 0.75% to $111 per barrel as Chinese lockdowns continue to impact global demand of energy. The Bloomberg Commodity index dropped 1.55% led by the sharp decline of steel and iron ore, partially offset by the good performance of wheat (+6.40% last week). The world economy weighted inflation year-over-year keeps trending higher, up 8.57% as of mid-May.

Europe

European Central Bank (ECB) officials hinted that they could end Quantitative Easing by the end of June and start raising rates in July. Bank of France’s Villeroy, Bundesbank’s Nagel and ECB’s Schnabel expressed their support for a swift shift in monetary policy as Euro area inflation rose 7.5% year-over-year in April. Recent rate hikes from the Federal Reserve and Bank of England show that the ECB chose a different path to prioritize the economic recovery from the Pandemic. Last week, coordinated efforts to add European sanctions on Russia failed to materialize as Hungary continues to veto the package. Unanimous approval from all Member States is required to legalize the new proposed sanction package. According to the latest guidance published by the European Commission, European companies can purchase Russian gas without breaking sanctions imposed on Moscow. The Euro STOXX index gained 1.39% last week.

In the United Kingdom (UK), Bank of England (BOE) warned more rate hikes might be needed to fight inflation. Policy makers expect consumer prices to peak around 10% in the fourth quarter, which could cause a temporary spike in unemployment rate to 5.5%. BOE Deputy Governor, Dave Ramsden, told reporters, “I don’t think we’ve gone far enough yet on bank rate, but I do think what we’ve already done is having an impact.” New data from Bank of England shows Britons are facing the second-worst year on record for living standards as real post-tax household disposable income shrank this year. Prime Minister Boris Johnson offered to extend price cap for energy bills beyond 2023, and tampered expectations for additional government support. He said, “For every pound of taxpayer’s money we spend on reducing bills now, it is a pound we are not investing in bringing down bills and prices over the longer term.” The FTSE 100 index gained 0.41% last week.

APAC

In China, new economy data show that Xi’s COVID Zero policy is taking a toll on the economy. Indeed, industrial output fell 2.9% year-over-year in April, and retail sales plunged 11.1% during the same period according to China’s National Bureau of Statistics. China also registered record high youth unemployment, with the rate of 16 to 24-year-olds climbing to 17%, compared to the headline jobless rate of 6.1%. Bloomberg Economics estimates that GDP declined 0.68% year-over-year in April, which would be the first contraction since 2020. Full lockdowns are still in effect in major cities despite the economic cost. The Vice Mayor of Shanghai said on Sunday that “normal life and production will only fully resume by mid-to-late June.” The auto industry is disproportionately affected by lockdowns, as not a single car was sold in Shanghai last month. Despite supply chain disruptions, the cost of shipping 40-foot box containers remains stable at $8,666, compared to $9,112 at the beginning of April. The Shanghai Composite index climbed 2.76% last week.

In Japan, producer prices rose 10% year-over-year, slightly above estimates of 9.4%. Bank of Japan Kuroda says “aggressive easing needs to remain”, although he warns about sharp yen moves that could potentially affect households and firms. In fact, Yen-based import prices rose 44.6% versus 34% a month earlier. Kiyoshi Imamura, managing director of a steel manufacturing company, claims macro conditions are pushing Japanese manufacturers to move their offshore operations to Japan. According to him, “the yen has fallen so much that Japan’s trade balance won’t be back in the black. Under such circumstances, companies judge it’s better to do manufacturing in Japan.” Economists expect rising inflation to be temporary and see a peak at 2.2% in October. The NIKKEI 225 index dropped 2.13% last week.

Source: China’s National Bureau of Statistics, Bloomberg as of 05.18.22

Emerging Markets

In Mexico, the Central Bank lifted its benchmark interest rate by half point to 7%, in line with Federal Reserve’s rate hike. Banxico said in a statement, “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” One of the Deputy Governor voted for a 75bps hike, a move that would have surprised markets as the consensus was for 50bps rate hike. The Mexican Peso rallied on the news and is now up 2.33% year-to-date versus the U.S. dollar, showing resilience in a strong dollar environment compared to other emerging market currencies. Mexican stocks gained 0.08% last week.

In Chile, a proposal to replace the concession model for copper producers with a system of temporary and revocable permits failed to meet the required two-thirds threshold to be adopted by the Chile Convention. As a result, the draft constitution lacks a clear mandate for mining rights, leaving legislation subject to changes in the future. Copper miners soared on the news as the current systems provide more earnings visibility and favors incumbents. Meanwhile, consumer prices continue to erode the purchasing power of Chileans. Last month, Chile CPI rose 9.4% year-over-year, well above the 3% target. Chile’s Central Bank lifted its benchmark interest rate by 125bps, to 8.25%, 25bps above the consensus estimate. Chilean stocks gained 0.25% last week.

Source: Banco de Mexico, Instituto Nacional de Estadistica, Geografia e Informatica, Bloomberg as of 05.18.22

The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.

This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.

Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.

Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.

Weekly Insight 05.24.22

highlights

U.S. equities came under pressure again with both the S&P 500 (3.05%) and NASDAQ (3.82%), closing lower for the seventh straight weekly decline, the longest such decline since 2001 and 2011.Consumer Staples (8.63%), Consumer Discretionary (7.44%), and Technology (3.77%), were the worst performing sectors on the week.The Federal Reserve continued to re-iterate the need and likelihood of a 50bp hike at the upcoming two meetings.$550 billion in market value was erased from consumer stocks over the past five days, as retailers came under pressure following earnings releases that showed inventory build, a shift of consumer spending, and margin pressure.In Europe, Christine Lagarde announced that net bond buying should end at the beginning of the third quarter.In China, the People’s Bank of China cut the Loan Prime Rate by 25bps to 4.45% to support housing demand.In India, the government announced tax cuts and plans to boost subsidies on fertilizers by $14.2B to fight inflation.

U.S.

Last week the story remained the same as U.S. equities came under pressure again with both the S&P 500 and NASDAQ closing lower for the seventh straight weekly decline, the longest such decline for the S&P since 2001 (2011 for the NASDAQ). The Dow also dropped for an eighth straight weekly decline, the lengthiest streak in 99 years. Treasuries were mostly stronger across the curve, with the 10Y yield dropping back below 2.8% after hitting a recent high above 3.13% on May 6th. The Dollar index was down 1.5%, its sharpest weekly drop since February following six straight weeks of gains while oil pulled back slightly to finish largely unchanged.

Source: Bloomberg as of 05.24.22

The S&P managed to avoid closing in bear market territory (a decline of +20%) following a big afternoon rally on Friday, in what was a very volatile session with no significant incremental developments. Earlier in the week, investors saw the S&P 500 post its largest 1-day decline since June of 2020, declining 4.04%. The index now stands 16.66% below its January 3rd all-time closing high.

There were few places to hide in the sell-off, with Consumer and Technology stocks coming under the most pressure. With the most recent decline in Technology stocks, investors have seen the relative valuation premium versus Consumer Staples completely dissipate. The MSCI World Information Technology Index is now trading at 20 times forward earnings, a similar level to its consumer staples peers, which is in stark contrast to the premium previously seen. According to Bank of America’s May fund manager survey, Consumer Staples relative to Technology have been the most overweight since December 2008, given the current landscape.

Source: Bloomberg as of 05.24.22

While the week lacked a catalyst, many of the bearish themes remained in focus dominating headlines, as strategists remain convicted and continue to call for additional downside pressure. The spotlight continued to highlight:

Fed continuing their tighter monetary policy pathContinued inflationary pressuresChina’s COVID lockdownsPotential for a soft landing versus the probability of a recessionRetail spending as highlighted by earnings releases from retailers

RETAIL EARNINGS

One of the primary drivers behind the week’s price action was retailers who reported lackluster earnings, margins, and future outlook, while raising questions about consumer spending and company margins. When all was said and done, since Friday, some $550B in market value was erased from consumer stocks over the past five days, with Consumer Staples being the worst underperformer on the week, closing lower by 8.60%.

The week was a bloodbath for retailers in general, as many point to consumer spending habits changing, higher material costs, and rising inventories as a reason for the weakness. Consumers seem to be pivoting away from higher margin goods to cheaper ones as the cost of everyday life increases.

Both Walmart and Target gave comments, saying they are seeing customers trade down for cheaper “more bargain” goods, avoiding more expensive name brands, as the consumer channels spending more in basic need categories versus other discretionary purchases. Amazon and Walmart, who collectively employ over 3 million workers, have both stated they are freezing hiring effective immediately with similar retail brands likely to take comparable measures. 

Source: Bloomberg as of 05.24.22

Exacerbating the problem are stores that were once undersupplied with inventories, but are now oversupplied with products. Shipping delays and backlogs were so bad that some companies chartered cargo ships to keep their shelves stocked, and although that worked for a while, inventories have now started to get out of hand. As a result, retailers are marking down products, eroding profit as they seek new “in demand” goods to fill their shelves.

Among those contributing to the negative sentiment in the retail space were:

Walmart (-19.5%) flagged higher supply chain costs, general merchandise markdowns, and higher wage costs for the weaker numbers.Target (-29.3%) echoed the same sentiment with higher input costs and excess inventory.Ross (-21.9%) cut their forward guidance and reported declines year-over-year in both their revenue growth and earnings citing headwinds on spending of their lower-end consumer demographic. Lowe’s (-4.8%) missed 1Q comps, but were impacted by unseasonably cold temperatures in April.Home Depot (-3.0%) was lower despite reporting their highest 1Q sales in company history as they warned we would see a slow-down in the housing market potentially lasting five years, as well as noted a decline in transactions due to inflation and interest rates.

RETAIL EARNINGS

There was no meaningful change in the Fed’s narrative. Chairman Jerome Powell and others largely stuck to existing expectations that the Central Bank is committed to bringing inflation lower. Members of the Fed continued to re-iterate the need and likelihood of 50bp hikes at the upcoming two meetings, but also said they could move past the neutral rate if inflation persisted.

Given the Feds hawkish stance, aggressive monetary tightening by Central Banks is the biggest tail risk for markets, according to this month’s Bank of America global fund manager survey. Fears that the Fed will need to hike more aggressively than expected to combat inflation has taken growth optimism near all-time lows, with 72% of surveyed investors expecting a weaker economy in the next 12 months. Current cash exposure is the highest it has been since September 2001, while equity holding exposure has been slashed.

It is worth noting that investors will be looking at the minutes from the Fed’s May meeting. While there are likely no surprises given Fed members have been on the same page and have echoed the same commentary for weeks, we view the release as largely a non-event, with many of the risks already priced in.

Source: BofA Global Fund Manager Survey, Bloomberg as of 05.24.22

International

The Bloomberg World index decreased 1.08% last week, with growth down 1.78% and value down 0.54%. Oil posted its fourth consecutive week of gains with Brent oil up 0.90% to $112 per barrel amid the war in Ukraine and supply shortage. The dollar index softened from $104 to $103 despite a rally in U.S. Treasuries. In the United Kingdom (UK), retail sales jumped 1.4% in April, contrasting with all-time low consumer confidence reading. The UK economy also added more jobs than expected in April, clearing the path for more rate hikes from Bank of England at the next policy meeting.  

Europe

European Central Bank (ECB) President Christine Lagarde gave an update on monetary policy in a blog post on Monday. She announced that net bond buying should end at the beginning of the third quarter, which would suppress negative rates. She added that this policy adjustment would allow the ECB to raise rates at the July meeting, in line with forward guidance. This announcement most likely ended speculations of a 50bp hike in July, as Lagarde stressed that policy normalization would be gradual. The Euro has weakened over 6% year-to-date against the U.S. dollar, amid longer-than-expected accommodative policy. The spread between the German 10-year yield and the Italian 10-year yield edged higher, as the bond market is assessing the risks of imminent monetary policy tightening.

Source: Fed, BOE, ECB, Bloomberg as of 05.24.22

The European Commission published a new forecast showing that Euro-area output would barely grow in case of significant disruption to gas imports from Russia. In its base-case scenario, the European Commission sees 2.7% GDP growth in 2022 and 2.3% in 2023. Under a severe scenario caused by the stoppage of Russian gas imports, the Euro-area would grow 0.2% this year and 1% in 2023 while inflation would climb to 9%. Last week, the EU unveiled its €300B package to reduce dependencies on Russian energy and phase out of Russian gas by 2027. The plan covers energy savings, energy supply diversification, push into renewables and emergency backstop in case of Russian gas supply interruption. The Euro STOXX index dropped 0.71% last week

APAC

In China, the People’s Bank of China (PBOC) cut the Loan Prime Rate (LPR) by 25bps to 4.45% to support housing demand. The Loan Prime Rate was introduced in 2019 by the PBOC as the new lending benchmark for bank loans to households and businesses. The announcement came as China’s home sales declined faster in April under stringent COVID lockdowns. The one-year LPR was maintained at 3.7% to avoid further narrowing spreads with the United States. On the fiscal front, the government plans over $21B of tax relief for companies to offset the impact of lockdowns. This tax cut is even higher than 2020’s as well as those orchestrated the previous years at the peak of the trade war with the United States. The Shanghai Composite Index gained 2.02% last week.

In Japan, core inflation rose 2.1% year-over-year in April, slightly above the consensus of 2%. This is the first time since 2015 that core CPI hit the target set by Bank of Japan (BOJ). Bank of Japan Governor, Haruhiko Kuroda, said, “Prices are moving exactly as we have predicted.” He added that 2% inflation in unlikely to last in Japan as it is mostly driven by commodity prices and worsening trade factors. According to data released by BOJ, the Yen’s real effective exchange rate dropped to 60.9, the lowest purchasing power since August 1971. The government announced that Japan would allow small groups of tourists to visit Japan this month and gradually reopen borders. The Nikkei 225 index gained 1.18% last week. 

Source: BOJ, BIS, Bloomberg as of 05.24.22

Emerging Markets

In South Korea, early trade data show signs of slowdown amid China lockdowns. In the first 20 days of the month, exports to China only rose by a single digit, compared to 27.6% growth for exports to the United States. Semiconductor global shipments increased 13.5% year-over-year, the slowest increase since September 2021. Bank of Korea (BOK) chief said he would closely monitor July and August data to determine if a 50bp rate hike will be needed. Last month, headline CPI rose 4.8% year-over-year and core CPI rose 3.6%. The government has a different focus than BOK as it just proposed $46.3B extra budget to support COVID-hit businesses and foster economic expansion. The KOSPI index rose 1.35% last week.

In India, the government announced tax cuts and plans to boost subsidies on fertilizers by $14.2B to fight inflation. Indian Finance Minister said the government is committed to keep the price of essential items under control. India made a U-turn on its decision to ban wheat exports after facing backlash from G-7 countries. The initial decision was motivated by national food security as wheat prices soared to an all-time high following the Russian invasion of Ukraine. Indian farmers also lobbied against export restrictions as they claim the policy would hurt their competitiveness on global markets. The Nifty 50 index gained 3.07% last week.

The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.

This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.

Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.

Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.

Weekly Insight 04.20.22

highlights

The NASDAQ, S&P and Dow all finished lower, in a week that was devoid of a catalyst, as the path of least resistance remained lower.Value outperformed growth again, expanding its outperformance to 5.70% over the last two weeks.Re-opening names such as hotels, airlines, cruise lines, and casinos all outperformed, while Tech was the worst performing, coming under pressure as yields continued to jump.CPI showed a headline increase of 8.5% Y/Y, the largest gain since 1981, while PPI reported an all-time high Y/Y increase of 11.2% for March.Yields on U.S. Treasuries climbed to their highest in years as the 10-year Treasury closed at 2.82%, its highest levels since December of 2018.Expectations still call for about ten rate hikes in total this year, with the odds increasing for 50bp hikes in May, June, and July, ultimately putting the benchmark rate between 2.50% & 2.75%.In the United Kingdom, consumer prices climbed to 30-year high of 7% last month. The FTSE 100 index declined 0.69% last week.The European Central Bank left its key deposit rate unchanged at 0.5% and announced that its asset purchase will slow down from €40B in April to €20B in June.

U.S.

U.S. equities finished mostly lower on the week with the Russell 2K being the broadest index that edged out a small weekly gain. The NASDAQ and S&P 500 fell for a second straight week, both losing over 2%. Growth names were again a large underperformer to value, drifting lower by more than 2.70% during the shortened week, bringing growth’s two-week underperformance against value to 5.70%. The FANMAG complex was also lower with all names closing between 2% and 6% lower, highlighting the risk-off tone underpinning equities.

Source: Bloomberg as of 04.20.22

Tech names were again the worst performing, coming under pressure as soaring yields continue to hit the long-duration assets. Semis fell for a third straight week, while FinTech (FINX), and profitless tech ARK Innovation (ARKK) also came under pressure, shedding 2.8% and 2.7% respectively. Healthcare underperformed with life science tools and services names being the main drag on the sector. Financials and more specifically, banks were lower after an underwhelming start to earnings season.

Re-opening names such as hotels, airlines, cruise lines, and casinos all rallied this week, with airlines being a notable outperformer after positive comments from Delta’s (DAL +15%) upper management, saying the carrier has sold a record number of tickets in the past five weeks as customers set aside their concerns about inflation to splurge on air travel.

There were few notable developments on the week, with the path of least resistance being lower. Despite a number of bullish talking points emerging, they did not gain much traction in terms of price action. Some of the points referenced were:

Peak inflationBetter Supply Chain trendEconomic normalizationStrong ConsumerOptimism surrounding quarterly earnings

INFLATION AND THE FED

Treasuries finished the week under pressure, driven by Tuesday’s March CPI report, which largely came in-line with expectations, showing a gain of 8.5%, which was the largest gain since 1981. The widely followed inflation gauge rose 1.2% from a month earlier, with gasoline costs driving half of the monthly increase. Following the report, yields declined before pushing to new three-year highs as the 10-year yield finished at 2.82%, its highest closing yield since December of 2018. Wednesday‘s PPI number, reported from U.S. producers rather than consumers, hit its highest year-over-year reading of all time at 11.2% for March.

Analyst commentary noted the CPI report likely represented peak inflation, with many expecting inflationary pressures to continue to subside as supply chain issues begin to ease, and the Fed continues to increase lending rates. According to this week’s NY Fed Survey of Consumer Expectations, one-year inflation estimates now stand at 6.6%, the highest on record, while the three-year expectation moved slightly lower, slipping to 3.7%, down from 4.2% six months ago.

Source: Bureau of Labor Statistics, Bloomberg as of 04.20.22

Despite potentially peaking inflation and a CPI report that largely came in-line with expectations, market participants increased the odds of a 50bp hike in May, June, and July. Odds now show the market is pricing in a 91% probability of a 50bp hike at the May meeting.

Additionally, the new total hikes being priced now stands at 10 for 2022, although probabilities of this event fell this week from 57% to 42%. Ten potential hikes this year, ranging from 0.25% to 0.5% would ultimately push the benchmark rate up to the 2.50% – 2.75% range.

Source: Bloomberg as of 04.20.22

With a more hawkish Fed taking action to try and curb inflation pressures, 30-year mortgages touched their highest levels in more than a decade, surging to 5%. The last time rates hit 5% was in February 2011 and comes as elevated home prices and already tight inventory are making homeownership the most expensive in a decade. With housing and rent accounting for roughly one-third of the CPI basket, these higher borrowing rates could potentially cool headline CPI if the housing sector slows.

Ultimately, investors, economists, and other officials still believe the Fed can engineer a soft landing, despite the warning of the Financial Times given that the Central Bank has a spotty record when trying to engineer one, with six of the last eight campaigns to fight inflation have resulted in a recession soon after.

Recent Fed speak continued to mirror the hawkish outlook seen from investors (despite the odds of 10 hikes falling), with the following making headlines this week:

Christopher Waller told CNBC he sees multiple half point rate hikes aheadLael Brainard said tighter financial conditions should start to slow overall demand and reduce the level of job openings

Source: Bloomberg as of 04.20.22

EARNINGS

Earnings season kicked off with large banks reporting results with few notable takeaways.

JPMorgan announced an earnings miss, although some analysts noted better trends around expense control.WFC slumped more than 3% after top line revenue missed estimates, while earnings came in ahead (although were down on a year- over-year basis). The bank reported weaker net interest income and ongoing risks to the downside from the war in Ukraine as the reason for the miss.

International

The Bloomberg World index decreased 1.61% as peace talks between Russia and Ukraine stalled. Brent oil surged from $102 per barrel to $112 as Libya closed its biggest oil field and warned of additional shutdowns. As a result, Libya’s total oil production is down by half a million barrels a day. Bloomberg reported that two Libyan ports have been ordered to stop loading oil after political protests called for the resignation of the Prime Minister. Instability in the region is another upside catalyst for oil prices and inflation. World Bank cut its 2022 global growth outlook from 4.1% to 3.2%, citing Russia’s invasion and COVID-19 as the main headwinds.

Europe

The European Central Bank (ECB) left its key deposit rate unchanged at 0.5% and announced that its asset purchase will slow down from €40B in April to €20B in June. ECB President Christine Lagarde announced that Quantitative Easing should end in the third quarter amid the 7.5% surge in inflation. Policy makers reportedly agreed to lift rates as soon as June by 25bps. Markets anticipate at least two rate hikes by year- end. In March, the Euro-area consumer confidence plunged to the lowest level since May 2020. First quarter earnings announcements will provide more clarity regarding the overall health of consumers. The Euro STOXX index dropped 0.15% last week, with technology down 2.22%.

In the United Kingdom (UK), consumer prices climbed to 30-year highs of 7% last month, adding pressure on Bank of England to tighten financial conditions. Economists project 9% inflation in April as a 54% price hike in energy bills is expected to kick in. Wages data also point to a healthy economy, with 5.4% year-over-year growth in March versus 4.8% in the prior month. Tesco, UK’s largest retailer, warned investors

that cost pressures could affect profit margins this year. Bank of England sees inflation peaking at 8% this year before gradually slowing down. Markets anticipate 25bps rate hike at the next policy meeting on May 5th. The FTSE 100 index declined 0.69% last week, with financials down 3.8%.

APAC

In China, new economic data gave a glimpse of the impact of COVID-19 restrictions. While GDP rose 4.8% year-over-year in the first quarter, retail sales dropped 3.5% in March from a year ago and the unemployment rate rose to 5.8%. Over the past weeks, monetary and fiscal authorities announced various stimulus packages to offset the cost of COVID-19 restrictions. In Shanghai, officials encouraged companies to restart production despite surging COVID-19 cases. The People’s Bank of China announced that it would cut the reserve requirement ratio for most banks by 25bps to ease financial conditions. Despite these measures, Chinese stocks broadly remain in a bear market as markets expect worse economic readings for April and possibly May. The Shanghai Composite index declined 0.81% last week.

In Japan, the Yen extended its decline against the greenback for a twelfth straight session as Bank of Japan (BOJ) intervened in the bond market to cap yields. BOJ governor, Haruhiko Kuroda, kept a dovish tone in his recent press conference and said that the Central Bank will remain accommodative to stimulate the economy. Kuroda added that a weak Yen should be positive for the economy and that the BOJ will discuss stimulus exit plan when the 2% inflation goal is reached. In February, inflation climbed to 0.9%, the highest level since April 2019. The NIKKEI 225 index gained 0.69% last week.

Source: Bloomberg as of 04.20.22

Emerging Markets

In Brazil, President Jair Bolsonaro announced his plan to spend $1.3B to boost public worker wages by 5% starting in July. The news came after several weeks of protest and strikes from state and municipal workers, including employees from the Central Bank and the Internal Revenue Service. Surging costs of energy and raw materials pushed inflation to 11.3% year-over- year growth in March, up from 10.5% a month earlier. Petrobas, the leading oil and gas producer in Brazil announced a 25% fuel price hike despite little political support. Last week, the state-controlled energy producer selected former energy minister official Jose Mauro Coelho as the new CEO. Energy prices will play a key role in public opinion ahead of presidential elections later this year. Brazilian stocks dropped 1.81% last week.

Source: Bloomberg as of 04.20.22

The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.

This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.

Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.

Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.

Weekly Insight 03.01.22

highlights

U.S. equities finished the week higher after the S&P 500 staged a 3.74% rally on Thursday and Friday, despite moving lower earlier in the week amid the ongoing conflict between Russia/Ukraine.A number of sanctions aimed at the financial health of Russia were levied by world leaders, with the goal of maximizing the most economic damage in both the short and long-term.Among these was the removal of some Russian banks from SWIFT, an integral part of exchanging funds.Growth names outperformed value as the geopolitical tensions reduced the probability of an outsized rate hike by the Federal Reserve. Odds of a 50bp hike fell to 14%, down from 81% just 2+ weeks ago.WTI crude settled up 1.5%, above $91/barrel, but off best levels of $100.54 (seen Thursday), due to ongoing supply issues which will be exacerbated amid the ongoing conflict given Russia’s influence on the global oil market.Even as equities have sold off to start the year, investors have not seen any capitulation according to BofA’s Flow Show Report. Money managers in aggregate reduced their equity holdings by one third in the prior two weeks according to the National Association of Active Investment Managers. Exposure to equities fell to 44%, a level seen in 2020.The VIX surged on Monday and posted its highest monthly average since October of 2020 while yields declined as treasuries were bid up in a flight to safety.The Swiss Franc staged its biggest gain against the Euro since 2018 and gold held near the more than 13-month highs it touched last week.After falling into correction territory (Decline of 10% or more), the S&P 500 has averaged a staggering 24.8% return one-year post entering correction territory and is also higher 90.3% of the time.European natural gas surged 10% on Monday after another round of international sanctions on Russia.In Germany, Chancellor Olaf Scholz announced that defense spending will be raised to 2% of GDP going forward, in line with NATO demands.South Korea is exploring banning exports of strategic items to Russia. The government will soon make a decision of non-strategic goods.

LAST WEEK

Despite the whipsawing headlines throughout the week, U.S. equities actually finished higher with the S&P 500 gaining 0.82%, snapping its two-week losing streak. Other U.S. benchmarks also finished higher, with the exception of the Dow Jones which finished largely flat (-.027%). Indexes reversed losses seen on Monday and Tuesday with a big Thursday and Friday rally in which the index gained just under 4% over the final two trading days. The rally came as sanctions imposed on Russia were less draconian than originally expected, paired with the possibility for a more dovish Central Bank outlook.

Source: Bloomberg as of 03.01.22

The week was a wild one, with geopolitical headlines dominating the narrative following Russia’s invasion of Ukraine, which ultimately was the key factor in the week’s price action. With the narrative evolving on a second-by-second basis and the world watching, we will briefly touch on a number of what we believe are the most important sanctions that have been handed down thus far:

The United States and its allies moved to block certain Russian banks’ access to the SWIFT international payment system (This was seen as the harshest sanction thus far and will limit Russia’s ability to process international payments) which could lead to missed payments and giant overdrafts within the international banking system.The U.S. Department of the Treasury targeted the “core infrastructure” of Russia’s financial system, sanctioning two of its largest banks – state-backed Sberbank and VTB Bank. Also on the sanctions list are three other large banks and certain senior executives.Officials in Washington added VTB, Otkritie, Novikombank and Sovcombank to the Specially Designated Nationals (SDN) list. The move effectively kicks the banks out of the U.S. financial system, bans their trade with Americans, and freezes their U.S. assets.Imposed restrictions on a number of goods including semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies”.Sanctioning on some of President Vladimir Putin’s closest allies, including the freezing of their assets, and the ability to travel globally. The UK, France and U.S. announced they will continue to target oligarchs’ houses and yachts, specifically.EU officials announcing restriction of their airspace to all Russian aircrafts and will ban state owned media companies Sputnik & RT.U.S. and other EU nations have also stopped all major Russian companies, as well as, the Central Bank from raising financing in their respective markets.The UK also announced they will not provide port access to Russian ships.Halting the certification process of the Nord 2 pipeline running from Russia to Germany.Japan and others are set to freeze Russian Central Bank Forex assets, while Canada has announced plans to bank Russian crude imports.Norway currently undergoing the process of dropping Russia from its Sovereign Wealth Funds.

MARKET PRICE ACTION

With the risk-on tone, growth outperformed value on the week with many believing the escalating geopolitical conflict may cause Central Banks globally to re-assess their plans to raise benchmark rates at a slower rate than initially thought. Following the invasion, odds for a 50bps hike in March fell to 14%, which is down from 81% more than two weeks ago, and helped spur a significant rally in growth stocks. Most defensive plays underperformed, but from a sector standpoint there were not many themes to be noted.

Instead, various sub-sectors saw certain pockets of strength which included, Industrial metals, hospitals, pharma, biotech, infrastructure, cyber security, semis, Aerospace and Defense and Energy.

Source: ICE Futures Europe, Bloomberg as of 03.01.22

WTI crude settled up on the week by 1.5%, just above $91/barrel, but did finish well off Thursday’s peak of $100.54. The price moves in both crude and brent oil have been some of the most volatile in years. So far this month, Brent futures have moved by $3.25/ day, which includes a run of 11 consecutive days with intraday swings of more than $2, the longest such stretch in almost two years. Given world reliance (to some degree) on Russia’s energy sector we expect the volatile swings in commodity markets to continue for quite some time. 

Treasuries were weaker with the yield curve continuing to flatten while the dollar was stronger against major crosses. Ruble weakness was the main FX story of the week after it fell to new record lows following sanctions.

Even with the rally on the week, indexes still remain well off their all-time highs seen late last year and early this year. With stocks coming under pressure and geopolitical tensions ramping up, money managers in aggregate reduced their equity holdings by one third in the prior two weeks according to the National Association of Active Investment Managers (that tracks investment advisers from 125 firms). While investors have yet to see capitulation in equity positioning according to Bank of America’s weekly flow show report, exposure to equities in the survey mentioned above fell to 44%, a level last seen in the spring of 2020. In the absence of capitulation, it appears that “bad news” is more so priced in to current equity index levels than not.

RUSSIAN INVASION

Vladimir Putin announced the beginning of a “special military Operation” on Thursday morning that began with missiles impacting several sites across the country of Ukraine, followed hours later by ground forces crossing into the country at multiple locations. Over the last four days, Russian forces have been limited in their successes, with the main surprise coming in Ukraine’s capital of Kyiv, which has seen civilians take up arms to defend their country.

Source: Bloomberg as of 03.01.22

Regardless of the results of the conflict, markets seemed able to stomach some added uncertainty in commodity markets and a further increase in energy pricing. Long-term, the shortage of key Russian commodities primarily Crude oil but also Nickel, Aluminum, and precious metal Palladium, (Norilsk Nickel in Siberia produces at around 30% of the world’s supply), could produce supply chain bottlenecks even without retaliatory sanctions from Russia’s government. Western Powers, at this time, have not restricted access to oil and energy products with these sanctions and still plan to use Russian natural gas for the foreseeable future.

Even as geopolitical conflicts bring an enormous amount of uncertainty to investor’s doorstep, generally price action in U.S. equity markets is positive in the months and years to follow. With a number of wars listed below, the U.S. stock market went positive in the months following the beginning of war (with the exception of the Afghanistan war, which also in large part connected to the 2000 dot come bubble).

After falling into correction territory (Decline of 10% or more), the S&P 500 has averaged a staggering 24.8% return one-year post entering correction territory and is also higher 90.3% of the time. Over a two-year period, the S&P 500 has been higher 86.7% of the time and averages a 37.4% return off the lows.

Source: Fundstrat, Bloomberg as of 03.01.22
Source: Morningstar Direct, Bloomberg as of 03.01.22

America’s involvement in the Russian/Ukraine conflict is more indirect at this time with no U.S. soldiers on the front lines. However, we continue to monitor and assess the ever-changing investing backdrop so that clients can be positioned in a way that we believe will allow for them to meet their long-term strategic goals. Despite trying to summarize the ongoing conflict, given the very fluid dynamics of the situation, we believe this is a great overview of the struggle.

ENERGY AND COMMODITIES

Despite Russia’s small direct impact on the U.S. market, Europe is very involved with the Russian economy and receives about 40% of its natural gas and 25% of its oil from Russia. The Primary risk of a Russian market disruption is concentrated within the energy and commodity sectors.

In the case of energy, Europe has few short-term substitutes for its energy needs and is likely to depend much more heavily on U.S. imports to help offset the loss and maximize damage to the Russian economy (Oil & gas accounted for 60% of Russia’s exports and 39% of federal budget revenue in 2019). Ultimately, the effect may be felt by U.S. consumers at the pump as the price of oil continues to move higher.

While there have been some comments by President Biden in the past stating that the U.S. could coordinate the release of strategic reserves with other countries, that would only have a limited effect given the number of reserves and current undersupply. Adding to oil’s upside momentum is Iraq, which halted output at two fields that can pump almost 500K/barrels a day between them, only exacerbating the supply side of the equation. Even as OPEC+ is scheduled to meet this week, expectations are for the cartel to stick with their current plan of gradually increasing oil production, doing little to help the undersupplied market.

With Energy costs on the rise amid the geopolitical turmoil, there have been more discussions about the potential effects regarding higher inflation in the U.S., which could force the Fed and other Central Banks to tighten more than markets currently expect, as rate normalization get underway. The faster tightening is not expected right away but may come as the global economic impacts of sanctions are better understood.

This Week

Stocks almost erased their losses on Monday as traders assess the latest developments following a wall of sanctions (mentioned earlier) against Russia. The NASDAQ and Russell 2K closed higher on the session while the S&P 500 and Dow Jones trimmed most of their earlier losses. With February closing out, the S&P 500, Dow Jones Industrial and NASDAQ Composite all declined for a second straight month, the longest losing streak since October 2020.

Source: Bloomberg as of 03.01.22

The VIX surged on Monday and posted its highest monthly average since October of 2020 while yields declined as treasuries were bid up in a flight to safety. The Swiss Franc, a safe Haven asset staged its biggest gain against the Euro since 2018 and gold held near the more than 13-month high it touched last week. Oil which jumped over 4% on Monday, but finished off best levels, advanced after the U.S. and allies have discussed potentially releasing about 60MM barrels of crude from emergency stockpiles to quell supply fears, although the move will only help temporarily if the conflict is prolonged.

Source: Bloomberg as of 03.01.22

As world leaders condemn President Putin’s actions, they have rushed to take a number steps to deter additional escalations from his regime.

Following sanctions, Russians lined up around the country to withdraw funds amid concerns the Ruble would continue to free fall, which was down over 30% when trading opened on Sunday night in FX markets. The Ruble, being quoted at 110 to 120/dollar by Russian Banks had traded at 75 before the invasion.

Source: Bloomberg as of 03.01.22

With the devaluing of the currency, estimates show this could add about 5% points of inflation, which had already climbed to just under 9% in January, and was more than double the 4% target the Central Bank was trying to maintain. As the Ruble collapsed, Russia’s Central Bank raised lending rates to 20% to try to spur inflation and provide some stability to the currency.

While the fallout in U.S. markets was limited, shares of Russian companies cratered in the U.S. and London after Moscow’s market went dark and closed on Monday and Tuesday. Sberbank’s depositary receipts sank a record 74%, retailer Magnit slid 80%, and Gazprom dropped 53%.

International

The Bloomberg World index dropped 0.67% amid escalation of the Russia/Ukraine war. Western allies appear to be unified to impose sanctions on Russia. Geopolitics uncertainty is causing massive upswings in volatility as investor reshuffle their tactical asset allocation. Gold continues to shine as real yields decline. The Dollar index rallied last week ahead of the Fed policy update to Congress. OPEC+ will hold a crucial meeting this week, but the consensus is that they will stick to original plan despite political pressure to increase output.

Europe

European natural gas surged 10% on Monday after another round of international sanctions on Russia. This weekend, western nations agreed to exclude some Russian banks from SWIFT to further isolate Russia from global trades. The European Union is considering additional penalties on state company executives as well as banning Russian flights. In Germany, Chancellor Olaf Scholz announced that defense spending will be raised to 2% of GDP going forward, in line with NATO demands. Bank of Russia doubled its benchmark interest rate to 20% in an emergency meeting on Sunday as the ruble plunged 30%. The DAX index dropped 3.16% last week, while the CAC 40 index decreased 2.56% during the same period.

Source: ICE Exchange, Bloomberg as of 03.01.22

Last week, European Central Bank (ECB) President, Christine Lagarde, said that she is monitoring the situation in Ukraine with ECB members and that it will be taken into consideration at the next policy meeting. She added in an official statement that “The ECB will ensure smooth liquidity conditions and access of citizens to cash. The ECB will implement the sanctions decided by the EU and the European governments. The ECB stands ready to take whatever action is needed to fulfil its responsibilities to ensure price stability and financial stability in the euro area.” The Euro STOXX index dropped 2.63% last week, with banks down 8.52%.

APAC

The Brazilian government posted record monthly budget surplus in January of $19.8 billion due to strong tax revenues. President Bolsonaro is exploring the idea of releasing another stimulus package ahead of October’s presidential elections to offset rising fuel costs. Mid-month consumer prices rose 10.76% year-on-year in February, slightly above the consensus estimate of 10.63%. This print makes Central Bank’s monetary policy decision harder, as previous rate hikes had negligible effects on inflation. If the government gets a fiscal package approved through Congress, monetary tightening could be counterproductive. In January, net debt was 56.6% of GDP, down from 57.3% in December. Improving public finance keeps attracting foreign investors and boosting the Brazilian Real. Brazilian stocks gained 0.23% last week

In Japan, factory output contracted for a second straight month in January amid supply shortage. Automakers, iron and steel manufacturers led the decline according to Japan’s Industry ministry. Retail sales fell 1.9% month-over-month as consumer confidence declined to a five- month low. Prime Minister Fumio Kishida addressed the parliament and reaffirmed his ambition to implement “New Capitalism” policies. According to him, “Capitalism isn’t sustainable unless it is something that belongs to all stakeholders. From that point of view, it is important to accept that the fruits of growth are flowing to shareholders, and to think about that situation.” Kishida’s administration is exploring raising taxes on capital gains and regulating share buybacks. The July upper house election will be crucial as a defeat will cut short his tenure as a Prime Minister. The NIKKEI 225 dropped 1.95% last week.

Emerging Markets

In South Korea, The Markit Manufacturing PMI climbed to 51.90 in December from 50.90 a month earlier. According to survey provider IHS Markit, “The final round of 2021 survey data epitomized the supply-constrained narrative we’ve seen develop this year. Given South Korea’s prominence in the automotive and electronics industries, substantial improvements in global supply chains will be required before we see a meaningful acceleration in manufacturing growth.” Exports grew 18.35% year-over-year, moderating from a 32% annual surge a month earlier. The KOSPI index declined 0.76% last week, with services down 7.71%.

Source: Bureau of Labor Statistics, Bloomberg as of 01.11.22

South Korea is exploring banning exports of strategic items to Russia. The government will soon make a decision of non-strategic goods. Furthermore, South Korea decided to release its strategic oil reserve and consider resale of LNG to Europe to help with the energy crisis. It will also participate in the SWIFT ban and provide humanitarian aid to Ukraine. The SWIFT ban already has collateral damage as some Korean shipyards are worried Russian clients may miss payments. Bank of Korea is expected to pause its tightening cycle following three rate hikes since August. The CPI decreased from 3.7% in December to 3.6% year-over-year in January. Korean stocks declined 2.47% last week.

The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.

This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.

Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.

Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.